Universe is scrapped as World faces crippling financial issues

Having built The World, an archipelago of artificial islands that bear only a passing resemblance to the Mercator projection, building The Universe ought to have been a breeze.

That was probably how it seemed to the Dubai-based property developer Nakheel when it embarked on these outlandish projects a few years ago.

Unfortunately, however, the global credit crisis has intervened to put paid to such hubristic thinking. Nakheel this week confirmed that plans for the Universe have been scrapped, and that The World is facing an uncertain financial future.

Nakheel, a subsidiary of Dubai World, has entered crisis refinancing talks with its consortium of banks. Some sources suggest that, unless it is bailed out by Abu Dhabi, Nakheel and by extension its owners, Dubai Inc, are destined for bankruptcy.

The refinancing is needed because, according to reports, sub-developers of The World have been unable to afford to commence construction.

Nakheel is assuming that banks will be prepared to provide further credit in order to get plans for The World back on track. However this is probably naive given most banks’ pressing need to repatriate capital at the moment, coupled with the growing awareness that, given the effect the sea tends to have even on compacted sand banks (ask an oceanographer what I mean), that the artificial archipelago will only have a short lifespan.

According to Property Wire:

Nakheel has spent $3 billion creating 254 artificial islands off the Dubai coast, of which 175 have been sold. But some of these buyers have now missed instalments and asked for help in funding their investments because of the global financial crisis.

On buying an island, owners would usually place a 15% deposit and then pay a further 15% every six months. The island would be handed over to them once 45% of the total was paid, with the balance due within another 18 months.

The World managing director Hamza Mustafa said a number of subdevelopers have asked for payment extensions and in some cases they were asking to quit as they can no longer afford to develop …

About 79 developers are involved in The World and 70 islands are still unsold. Six developers are expected to begin work on their projects this year, meaning construction will start on a total of 25 islands if the financing can be sorted out.

Separately, Nakheel is expected to have to scrap plans for a 1km (3,280 feet) , $21 billion tower called the Nakheel Harbour and Tower, which if built would be the world’s tallest building. The project was first announced as credit markets went into meltdown on 5 October 2008 but is likeluy to be put on hold or shelved within the next few days.

It has also emerged that inhabitants of Dubai who were evicted from areas due to be razed to make way for yet another tacky new development have been invited back. Maybe economic collapse has a bright side after all?

The developer of the $95 billion luxury Jumeirah Gardens project, another government-owned property developer named Meraas, says it doesn’t even know which parts of this development will proceed.

However there is a darker side to the property and financial crisis that is Dubai. Imad al Jamal, vice chairman of the UAE Contractors Association, has said that asking staff to take pay cuts and lower housing allowances is an acceptable approach for Blingopolis-based construction firms to take.

Al Jamal said. “Hopefully, this trend will continue, as right now it’s the best option for employees. In the last year or so, there was a big hunt for staff, and companies were paying exorbitant levels, so now salaries will come down to a more normal level.” It also implies that migrant labourers are going to be treated even more badly than has become normal in Dubai.

Looking at the broader picture, Dubai basically has no future unless Abu Dhabi continues to bail it out. And it is looking increasingly likely that Abu Dhabi is going to demand a quid pro quo. The local rumour mill is that it will want to take a big slice of the equity in Emirates Airlines, one of Dubai’s most iconic businesses, in exchange for bailing out its feckless wee brother.

If the balance of economic power between the two emirates were to change in this way, Dubai’s residents are unlikely even to be told. The absence of a free press, a censored internet, and abysmal levels of governmental disclosure make such obfuscation possible in Dubai.

This blog post was published on 9 January 2009. To read a selection of blogs and articles mentioning Dubai, click here